The Washington Post (Marianne Seregi)

The big idea: Grass-roots innovation processes combined with a healthy tolerance for failure is a recipe for game-changing innovation and organic growth.

The scenario: Microsoft employs 90,000 people and its products are used by millions of people around the world every day. Developing the next version of Windows or Office is easy for Microsoft, but the company has struggled when it comes to more radical innovation. In particular, significant organic growth has been difficult to come by and the company has resorted to acquisition as a strategy to fuel growth. Some of these never panned out — remember Microsoft’s bid to buy Yahoo in 2008? — and the future is unclear regarding the impact of others, such as the recent acquisition of Skype. Meanwhile, competitors such as Apple and Google have consistently delivered organic growth and dominated Microsoft in key markets such as smartphones and tablets. To understand why this has happened, we need to consider the processes that drive innovation at Microsoft.

Historically, radical innovation at Microsoft — truly game-changing, big-impact innovation around products and services — occurred in a top-down fashion, a sort of “one man show” that depended on the vision and drive of Bill Gates. The most glaring examples of this were the “Internet Tidal Wave Memo” and the “Services Wave Memo.” These memos, authored by Gates, called for dramatic change in the products, services and technologies offered by Microsoft. Gates was famous for his deep understanding of technology and business, and he implemented his ideas through a very hands-on approach to management.

Gates’s approach also included practices such as the “BillG review” — meetings with Gates and his lieutenants in which major decisions (and employees) were dissected, a grilling that could make or break a career at Microsoft. An individual’s performance at a BillG review was often measured by the number of times Gates shook his head and yelled profanities. A BillG review was a right of passage for young Microsoft programmers and product managers and, over the years, came to embody the culture at Microsoft. Many managers adopted their own versions of the review. Microsoft insiders report that the company has very limited tolerance for failure. The result is that employees rarely take chances when it comes to innovation for fear that their next performance appraisal will be negative.

In 2008, Gates stepped down from his role as chief executive and chief software architect. Steve Ballmer took over as chief executive, and Ray Ozzie assumed the role of chief software architect. Ozzie’s charge was to drive significant innovation across Microsoft’s key business divisions. In an effort to tap into the diverse ideas of all Microsoft employees and turn those ideas into game-changing new businesses, Ozzie’s team developed a number of grass-roots innovation processes. These were meant to crowd-source ideas for products, services and business models from the firm’s 90,000 employees. The goal was to leverage their technical capability to lead the company toward the future, while working against the challenge of the short-term focus of each product group.

The resolution: Grass-roots processes at Microsoft have not delivered the type of game-gaming innovation that was expected. Competitors continue to produce novel products, services and business models, while Microsoft’s products languish and the company’s share price remains stagnant. The culture at Microsoft continues to be one of low tolerance for failure. In fall 2010, Ozzie left Microsoft, and the company has resorted to acquisition rather than organic growth as an innovation strategy.

The lesson: A lack of grass-roots innovation processes can frustrate employees who feel their ideas do not have a viable path toward reality. At the same time, grass-roots innovation processes in a company with low tolerance for failure can frustrate senior managers who will be left wondering why their employees don’t have more game-changing ideas. To achieve their full potential and deliver significant organic growth, grass-roots innovation processes require a healthy tolerance for failure.

— Raul O. Chao

Chao is an assistant professor of business administration at the University of Virginia Darden School of Business.